Time to regulate ‘credit-in-disguise’

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16th September 2015

Consumer leases are ‘credit-in-disguise’ and should be subject to the same regulations as payday lending, says Australia’s largest microfinance and financial inclusion organisation, Good Shepherd Microfinance, in its submission to the Small Amount Credit Contract (SACC) review today.

Good Shepherd Microfinance is calling for a limit on the cost and length of consumer leases, also called ‘rent to buy’ deals, the introduction of mandatory positive credit reporting for payday lenders and consumer lease companies and the expansion of ‘protected earnings provisions’ to all people on low incomes.

Chief Executive Officer of Good Shepherd Microfinance, Adam Mooney, said limiting repeat payday loans (one default loan or more than two loans in the past 90 days) needed to be a priority.

“Our microfinance workers see the harm caused by payday loans and consumer leases every day – they’ve been seeing it for years. Minimising repeat borrowing across the industry is crucial to protect vulnerable consumers,” said Mr Mooney.

New research released today found the number of borrowers taking out more than one payday loan in 12 months has more than doubled over the last decade from 17 per cent in 2005 to 38 per cent in 2015 and borrowers with concurrent loans have increased from 9.8 per cent to 29.4 per cent over the same period.[1]

“Many of our clients have previously juggled a combination of multiple payday loans and ‘rent-to-buy’ contracts. We need measures that include consumer leases in repeat and multiple lending provisions. The simplest and most effective way to do this would be through mandatory positive credit reporting.”

“This would mean that current and past loans and defaults are logged, giving lenders a simple way of checking an applicant’s loan and repayment history. It would enable responsible lenders to make an informed decision about whether someone can afford a loan, and make it easier to identify lenders who are ignoring responsible lending laws.

“We’d also like to see the protected earnings provision, which ensures no more than 20 per cent of a Centrelink recipient’s income is directed towards loan repayments, expanded to cover all borrowers with low incomes,” said Mr Mooney.

Good Shepherd Microfinance’s submission recommends that consumer leases be removed from the Centrepay direct payment system, the cost of contracts be capped at the same level as payday loans, that lease terms be capped at 18 months, and that the overall cost of the contract and government funded safe alternatives, such as NILS and StepUP, be disclosed and prominent in any marketing.

Good Shepherd Microfinances wants payday lenders and ‘rent to buy’ companies to refer eligible customers to safe, fair and affordable alternatives. NILS provides individuals and families on low incomes with access to loans of up to $1,200 for essential goods and services such as fridges, washing machines or car repairs.

“We’ve also recommended small amount credit providers develop a Financial Inclusion Action Plan. These plans would identify and implement measures that improve customers’ economic wellbeing such as referrals to NILS,” said Mr Mooney.

Good Shepherd Microfinance is developing a Financial Inclusion Action Plan (FIAP) program in partnership with Ernst & Young, Centre for Social Impact and Australian Government Department of Social Services. This program will support business, government, community and academic institutions to develop their own plans and advance financial inclusion in Australia, especially women.

The total number of households using a payday lending service in the past three years has increased by more than 80 per cent over the past decade (356,097 to 643,087 households).

All payday borrowers were either ‘financially stressed’ (41 per cent) in that they couldn’t meet their financial commitments or ‘financially distressed’ (59 per cent) because in addition to not meeting their financial commitments, they exhibited chronic repeat behaviour and had limited financial resources.

69 million households are in ‘financial stress’ which represents 31.8 per cent of all households and is a 42 per cent increase on 2005. Of the households in financial stress, 1.8 million are ‘financially distressed’ (just over 20 per cent of all households) – a 65 per cent increase on 2005.

The number of people who nominated overspending and poor budget management as causes of financial stress had decreased over the past 10 years (from 57.2 per cent to 44.7 per cent). Unemployment has become a more significant factor with over 15 per cent of households indicating this caused their financial problems.

In 2005, telephone and local shops were the most common interface to payday lenders. By 2015, more than 68 per cent of households used the internet to access payday lending. Mobile phones and public personal computers (eg libraries) were the most common device used.

The number of borrowers taking out more than one payday loan in 12 months has grown from 17.2 per cent in 2005 to 38 per cent in 2015 and borrowers with concurrent loans have increased from 9.8 per cent to 29.4 per cent in the same period.

The top three purposes for a payday loan were: emergency cash for household expenses (35.6 per cent). Emergency cash for household expenses included children’s needs (22.7%), clothing (21.6%), medical bills (15.1%) and food (11.4%). More payday loans are being used to cover the costs of internet services, phone bill and TV subscriptions (7.8 per cent) than in 2005 and 2010.

Many distressed households (38.7 per cent) were refinancing another debt and 36.8 per cent already had another payday loan when taking out their payday loan. Around half of the households that had used payday lending services indicated they would be willing to take out another payday loan.

Single men were more likely to use a payday loan (53 per cent) and the average age of the borrower was 41 years old. In the last five years, households in their thirties almost doubled their use of payday loans (16.3 per cent in 2005 to 30.35 per cent in 2015). Only 5.26 per cent of borrowers had a university education. The average annual income of payday borrowers in 2015 was $35,702.

‘Financially distressed’ households generally use payday loans either because it is seen as the only option (78 per cent), while ‘financially stressed’ households are attracted by the convenience (60.5 per cent).

The Stressed Financial Landscape (October 2015) was commissioned by Good Shepherd Microfinance, the Consumer Action Law Centre, and Financial Rights Legal Centre and conducted by Digital Finance Analytics.

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Good Shepherd Microfinance acknowledges Aboriginal and Torres Strait Islander people as the traditional owners of the lands on which we operate and work, and pays respects to their history, their living culture and to Elders past and present.